The first structured bond to be issued via blockchain has arrived —
without the involvement of an investment bank.

Marex Solutions, a specialist corporate hedging division of Marex Spectron, has issued a blockchain based structured note. It printed a “control note” at the same time, identical in every respect but cleared and settled through traditional means.

The trades were privately placed and the issuer opted not to disclose their size, but they carry two month tenors and are in sterling. The trades are principal protected notes and offer a 13% annualised payoff should the FTSE 100 index go up by 2.5% or more over their lifetime.

Marex Spectron is the arranger and the credit risk of the bond, although it was printed through Chartered Opus. Nivaura provided the platform and infrastructure for the issuance process and ResonanceX bought the paper. Allen & Overy provided legal services and documentation.

Avtar Sehra, CEO of Nivaura, told GlobalCapital: “We’re not a blockchain company. With our system, at a touch of a button you can choose to settle a transaction traditionally via Clearstream, or using blockchain, both in legally viable ways. When all things are equal, we tried to demonstrate that using a blockchain can be more efficient when it comes down to costs and time.”

In one respect, blockchain settled transactions like this are inarguably more efficient. The blockchain structured note was settled in under a minute, while the conventionally settled transaction settled in the traditional T plus two days.

Using blockchain, the trade was able to bypass Clearstream and avoid using a common depository.

Marex elected to use the Ethereum public blockchain for its trade. However, in principal, any blockchain, public or private, would be usable. As Sehra points out, “public blockchains are actually the hardest case”.

Using a public blockchain provides additional security because the security of a blockchain increases as the number of participants grows.

Sehra said: “Currently, many private blockchains don’t have sufficient or appropriate incentive structures to provide a secure network that can act like an independent third party.”

The cash leg of the transaction has proved something of a stumbling block for other blockchain bonds. For bonds denominated in fiat currencies (rather than cryptocurrencies), there must be a “tokenised” form of cash to allow the transaction to be settled on the ledger.

So-called stablecoins, cryptocurrencies that aim to maintain a 1:1 price relationship with fiat currencies, do exist, but their reputation has been marred by a CFTC investigation into opaque accounting practices by the largest stablecoin Tether.

Nivaura runs a sterling stablecoin. Provided its KYC requirements are met, it takes cash deposits from clients and holds them in its system. Tokenised versions of these are exchanged between users. Each token constitutes a claim on a unit of the cash held in its client accounts. Nivaura, as a regulated entity in the FCA’s sandbox, is required to provide regular external reconciliation to prove it has the cash in its account to justify the number of tokens.